Investments 

Schroders' Noffke doubles borrowing to buy UK shares

Schroders' Noffke doubles borrowing to buy UK shares

Sue Noffke, head of UK equities at Schroders, has over the past three months doubled the level of debt in the investment trust she manages in order to buy more shares exposed to the UK economy.

Ms Noffke has managed the £245m Schroder Income Growth trust for 23 years, during which time the dividend has increased each year.

Over the past 18 months she said she has increased the trust’s investments into companies focused on the UK economy, such as Tesco and house builder Crest Nicholson, while selling stocks focused on the global economy, such as HSBC.

She said: "The level of gearing (debt) on the trust has risen from 8 per cent to 16 per cent this year to date, the usual level I would have is 8 or 9 per cent.

"We manage it on a monthly basis, the board ask me whether I want to increase the amount of debt or pay some back, and we do it on the basis of what opportunities we see, and right now, UK equities are trading at valuations pricing a worse outcome for dividend payments than happened in the global financial crisis."

On selling her exposure to HSBC, she said the likelihood of US interest rates not rising at the pace previously expected was bad for the profitability of banks.

This is because banks are required by the regulators to hold a portion of their assets in cash and short duration bonds.

The interest rate on the cash and bonds rises when central banks raise rates, so a pause in the pace of rate rises means less potential for the banks to generate a return from those assets.

UK investment trust managers across the board have been increasing the level of gearing they deploy over the past six months, a period when international investors have been reducing their investments in UK shares.

Data from the Association of Investment Companies and Morningstar showed that in the period from the end of July 2018 to the end of January 2019, the average trust in the AIC UK All Companies sector doubled its gearing from 5 per cent to 10 per cent.

The average trust in the AIC Equity Income sector increased gearing to 9 per cent from the previous 8 per cent in the same time period.

Investment trusts, unlike open-ended funds, are able to borrow money and invest it. If the investments generate a return greater than the cost of the debt, this generates a return for investors, if the investments return less than the cost of the debt, investors lose out.

david.thorpe@ft.com